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Rating Update:

MOODY'S AFFIRMS Aa3 RATING ON MONTANA STATE UNIVERSITY'S OUTSTANDING BONDS; OUTLOOK REMAINS STABLE

09 Sep 2010

UNIVERSITY HAS $117 MILLION RATED DEBT OUTSTANDING

Montana State Board of Regents of Higher Ed.
Higher Education
MT

Opinion

NEW YORK, Sep 9, 2010 -- Moody's Investors Service has affirmed the Aa3 rating on Montana State University's (MSU) outstanding debt in conjunction with the University's planned conversion of the Series J 2005 bonds to a direct purchase with Wells Fargo Bank, N.A. in an index floater mode, from a variable rate demand obligation supported by a Wachovia letter of credit. At this time, Moody's has also affirmed the Aa3 underlying rating on the University's outstanding rated debt as described at the end of this report. The outlook remains stable.

LEGAL SECURITY: Facilities Revenue Bonds are secured by net student housing revenues at the Bozeman, Billings, and Northern campuses, net revenues of specific other auxiliary enterprises, certain mandatory student fees, land grant income, indirect cost recovery equivalent to annual debt service on the Series H bonds, and lease rentals from the Museum of the Rockies located on the Bozeman campus. Added to the pledge in 2005 are a student facilities enhancement fee, a student union building fee and bookstore revenues. The pledge of the student facilities enhancement fee and bookstore revenues expire with the maturity of the Series J 2005 bonds (structured to mature on November 15, 2035). The student union building fee and the bookstore revenues may be removed from the pledge in June 2015 pending the satisfaction of certain tests. There is no debt service reserve fund. There is a 1.1 times rate covenant and a requirement to maintain a repair and replacement fund of no less than $1.5 million. In fiscal year (FY)2009, pledged revenues provided 2.14 times debt service coverage. Preliminary pledged revenue report for FY2010 shows coverage rising to 2.3 times. The repair and replacement reserve fund held approximately $3.4 million in FY2009 and an estimated $2.8 million in cash and cash equivalents in FY2010.

INTEREST RATE DERIVATIVES: The University has an interest rate swap agreement with Deutsche Bank AG on the notional amount of $25.25 million, which equals the outstanding Series J 2005 principal. The University pays a fixed rate of 3.953% and receives a floating rate based on the SIFMA index. Deutsche Bank has the option to unwind the swap on December 14, 2016. If the option to terminate the swap is not exercised by the counterparty in 2016, the swap terminates on November 15, 2035. Deutsche Bank may also terminate the swap under certain circumstances, including if the University's rating falls below investment grade or if the University fails to post collateral (collateral posting threshold of $5 million at the A1 or A2 level). As of August 16, 2010, the mark-to-market value for this swap agreement was a liability of $4.8 million to the University.

In 2006, the University entered into a constant maturity swap with Morgan Stanley, effective November 15, 2006. The notional amount is $25.25 million, equal to the outstanding Series J 2005 principal. Under the agreement, the University pays a floating rate based on the SIFMA index to the counterparty, and receives 86.8% of the 10-year SIFMA index. Morgan Stanley may terminate the agreement under certain circumstances, including if the University's rating falls below investment grade. As of August 16, 2010, the mark-to-market value for this swap agreement was positive $1.8 million for the University. The University's solid credit fundamentals and prudent fiscal oversight of their derivative structures offset concerns with risks associated with the swaps. The University will maintain these swaps with the conversion of the Series J 2005 bonds to a direct purchase with Wells Fargo Bank, N.A.

STRENGTHS

*Favorable market position as the land-grant public university in the State of Montana (Aa1 G.O. rating, stable outlook) with a fall 2009 enrollment of 17,133 full-time equivalents (FTEs) across undergraduate and graduate programs and a growing research base. The University is one of two multi-campus universities that comprise the Montana University System under the governance of the Board of Regent of Higher Education of the State of Montana. Enrollment is spread across four campuses, with its main campus in Bozeman. MSU experienced healthy enrollment increases for fall 2009 and preliminary indicators show increased enrollment in fall 2010. Over the longer term, Moody's expects that MSU will maintain a stable market position given the their role in providing important educational and research services within the State. Additionally, while management continues to focus on increasing retention rates and higher education participation within the State, demographic trends have strengthened as the number of high school graduates is projected to increase slightly by 2021.

*Solid financial management has produced balanced three-average operating margin of -0.5%, as calculated by Moody's, healthy growth of net tuition per student and solid debt service coverage. The University's operating margin was slightly negative (-0.9%) in FY2009, due in large part to the inclusion of $9 million in other-post employment benefits costs from the implicit rate subsidy associated with retiree health benefits. Operating cash flow remained healthy at 8.8%, providing over three times debt service coverage. Management expects similar results for FY2010, despite a 5% decrease in state funding appropriation to $100.8 million, due to expenditure controls and approximately $4 million of federal stimulus funds.

*Fairly consistent state operating and capital support despite a weakened economy. In FY2009, MSU received $106 million of operating support. Preliminary 2010 figures show federal stimulus funds will help maintain operating support at comparable levels, while MSU received $25.8 million of capital support in FY2009 and $22.1 million in FY2010. For FY2011, management is currently budgeting for another decrease state funding to $98.4 million, offset by $5.7 million of stimulus funds. While Moody's believes the federal stimulus funding will provide temporary relief from state funding cuts, MSU will focus on revenue growth and expense containment over the longer term in order to maintain its track record of balanced operating margins after the stimulus funding ends. FY2011 will be the last year of aid from stimulus funds. The State initiated 2-year tuition freeze for resident students was also lifted in FY2010. For the FY2010-2011 biennium, the Board of Regents has allowed a 3% annual increase which MSU has implemented.

*Monthly liquidity of $97.5 million available as of June 30, 2009 translates into a solid 90 monthly days cash on hand from unrestricted investments liquid within one month. This amount fully covers the University's outstanding $25 million of variable rate debt. Preliminary results indicate continued healthy reserves for FY2010.

CHALLENGES

*Decrease in total financial resources to $201.8 million in FY2009 from $241.7 million in FY2008 due in part to volatile investment markets and the recognition of $18.3 million of OPEB liability, as required by GASB 45. In FY2009, expendable resources provided limited cushion for debt by 0.9 times and annual operations by 0.2 times. However, Moody's expects the University's leverage profile to remain manageable given no additional borrowing plans.

*Historically modest fundraising and endowment relative to other similarly rated universities. However, the University is in the planning stages of a capital campaign and has experienced strong gift revenues, averaging $33. 6 million over the past three years. MSU's endowment totaled $96 million at FY2010 and experienced positive returns of 14.4%, compared with a negative 20% for FY2009. As of June 30, 2010, the endowment's asset allocation included approximately 22% domestic equity, 20% absolute return strategies, 19% international equity,15% real assets, 13% fixed income and cash and11% private equity.

*Declines in federal research budget and increasing competitive pressures for sponsored research activities at a time when the University is seeking to grow its research activities. Offsetting this concern is the University's research enterprise has remained fairly steady over the past several years with grant and contract expenditures of an estimated $109.5 million for FY2010 from a variety of federal funding sources. The largest federal sponsoring agencies are the Department of Health and Human Services (27% of estimated FY2010 research expenditures to date), National Science Foundation (13%) and the Department of Energy (11%).

RECENT DEVELOPMENTS:

MSU is in the process of converting its Series J 2005 to a direct purchase with Wells Fargo Bank, N.A. in an index floater mode, from variable rate demand bonds in a daily mode supported by a Wachovia letter of credit. The outstanding $25 million of Series J is the only variable rate debt in the University's $117 million debt portfolio. Although limited, the University does have exposure to a call on its liquidity that could potentially result from an immediate termination of the direct purchase agreement. A termination of the agreement could result from certain events of default including failure to meet a debt service coverage ratio of 1.1 times. In FY2009, pledged revenues provided 2.14 times debt service coverage. Preliminary pledged revenue report for fiscal 2010 shows coverage rising to 2.3 times. Should the University trigger a default, Moody's believes MSU's unrestricted monthly liquidity of $97.5 million at the end of FY2009, provides a solid cushion with 90 monthly days cash on hand and over 3 times coverage of the outstanding variable rate debt. Estimates for FY2010 indicate an increase of liquidity to over $100 million. The Series J 2005 bond will be subject to a one-time mandatory tender (or put bond from Wells Fargo) at par at the end of the three-year initial index floating period, at which time the bonds can be remarketed at the option of the University to another mode.

Outlook

The stable rating outlook reflects Moody's expectation that MSU will show stable to modestly favorable operating performance driven by prudent enrollment and tuition management. We also expect modest growth in financial resources and manageable future capital and borrowing plans.

What could change the rating-UP

Substantial increases in financial resources with notable rise in gift revenues

What could change the rating-DOWN

Declines in enrollment; weakened operating performance; deterioration of balance sheet cushion

KEY INDICATORS (FY 2009 financial data and fall 2009 enrollment data)

Total Full-Time Equivalent (FTE) Enrollment: 17,133

Total Financial Resources: $201.8 million

Total Direct Debt: $117 million

Expendable Financial Resources-to- Direct Debt: 0.9 times

Expendable Financial Resources-to-Operations: 0.3 times

Monthly Liquidity: $97.5 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 90.2 days

Three-Year Average Operating Margin: -0.5%

Percent of Revenue from State Appropriations: 26.8%

State of Montana (General Obligation Rating): Aa1/stable outlook

RATED DEBT

Series A 1993: Aa3 underlying, insured by National Public Guaranty Corp.

Series H 2004, Series I 2004, Series J 2005 and Series K 2006: Aa3 underlying, insured by Ambac

Series L 2008: Aa3 underlying, insured by Assured Guaranty

CONTACTS

University: Craig Roloff, Vice President for Administration and Finance; Laura Humberger, Assistant Vice President for Financial Services, 406-994-4361

Underwriter: Wells Fargo Securities - Nick Taylor, 303-893-4006

METHODOLOGY

The principal methodology used in rating Montana State University was Moody's Rating Methodology for Public Colleges and Universities published in November 2006 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action with respect to the Montana State University was on August 26, 2008, when all the University's outstanding ratings were affirmed. That rating was subsequently recalibrated to Aa3 on May 7, 2010.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Amy Tanaka
Analyst
Public Finance Group
Moody's Investors Service

Karen Kedem
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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New York, NY 10007
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MOODY'S AFFIRMS Aa3 RATING ON MONTANA STATE UNIVERSITY'S OUTSTANDING BONDS; OUTLOOK REMAINS STABLE
No Related Data.
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